Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead

Departmental Papers, July 9, 2014

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In the Middle East and North Africa (MENA) countries price subsidies are common, especially on food and fuels.
Price subsidies are neither well targeted nor cost effective as a social protection tool, often benefiting mainly the better off instead of the poor and vulnerable.
The paper explores the challenges of replacing generalized price subsidies with more equitable social safety net instruments, including the short-term inflationary effects, and describes the features of successful subsidy reforms.

Price subsidies on food and fuels are widespread in MENA.
Generalized price subsidies frequently benefit the better off rather than the poor and vulnerable.
Replacing generalized price subsidies with targeted social safety nets raises short-term inflationary concerns that need to be managed.
Successful subsidy reforms have identifiable features (described in the paper).

Transitioning from price subsidies to social safety nets can produce short-term inflationary effects.
Ensuring equity and protecting poor and vulnerable groups requires careful design of social safety net instruments to replace subsidies.

Reforms that combine removal or reduction of generalized price subsidies with well-designed social protection measures.
Attention to mitigating short-term inflationary impacts during the transition.
Targeting mechanisms that improve cost-effectiveness and ensure benefits reach poor and vulnerable populations.